Average Markups Research Articles

The effects of resale price maintenance laws on petrol prices and station attrition: empirical evidence from Wisconsin

The state of Wisconsin's Unfair Sales Act prevents the sale of any item below cost in order to attract business, and specifically requires petrol (gasoline) stations to mark up their prices by at least 6% over the wholesale price. While the ostensible reason for this law is to protect small, independent retailers and thus enhance competition, the evidence suggests that the primary result of this law has been to inflate the price of petrol for Wisconsin consumers and facilitate tacit collusion in retail petrol markets. Petrol prices in two major markets in the state are examined, as well as in one market outside of the state where no minimum markup is required. The data show that when the penalties for violating the Unfair Sales Act were strengthened, the average markup of retail petrol over the wholesale price increased significantly in Wisconsin without a commensurate change in the average markup in the market outside of Wisconsin. It is also found that price dispersion is significantly lower over a two-year period in the protected Wisconsin market than in the unprotected markets.

Transmission capacity and market power: the effect on a dominant generation firm

We examine the effect of transmission on a firm's market power by analyzing the optimal dispatch for a dominant firm in a short-run regional electricity generation market. Application of our research to Colorado shows that the dominant firm can strategically congest transmission into the region to receive a maximum price 54.9% of the time. When it does not get the maximum price, the dominant firm can receive an 11.6% average markup over the competitive price. We show how the threat of entry across an enhanced transmission grid can increase competition and limit market power in Colorado.

An Analysis of Market Power Mitigation Strategies in Colorado's Electricity Industry

We apply an algorithm that optimizes the generation dispatch for a dominant firm to Colorado's electricity market and show that the dominant electricity generation firm can strategically congest transmission into the region to receive a maximum price over 50% of the time. When it does not get the maximum price, the dominant firm still receives an average markup more than 10% over the competitive price. We use this model to show how mitigation strategies such as enhancing the transmission grid, divesting the dominant firm's generation assets, and promoting entry into the generation market can lower prices in a wholesale electricity generation industry by limiting a dominant firm's market power.

Wages, Prices, the Natural Wage and Income Distribution

In a world of oligopoly and monopolistic competition, prices are essentially set using a markup principle. Real wages are money wages divided by average price level, which depends on average markup level. In the short run, as markups and real wages change when expectations are not correct, income distribution changes. The natural real wage is the real wage at full employment (natural rate of unemployment NAIRU). Even without economic growth the natural real wage, hence income distribution, can change. With economic growth, the natural real wage occurs at: lower rates of unemployment in dynamic societies; higher rates of unemployment in sluggish societies.

Macroeconomic Equilibrium Structure

It proposes an alternative theory to explain macroeconomics equilibrium for a multi-sector economic period. It includes a brief derivation, numerical examples of closed and open economies (Appendix I), preliminar statistics of some national accounts data (Appendix II), a 2-Sectors Cash Flow Analysis (Appendix III), and short comments. Based on Marx's concepts of surplus and exploitation, it does not use Labor Value Theory and only applies market prices to input-output global or national accounts. Main points are: 1) Input-Output National Income Profit Accounts (IO-Nipas) portray an inner equilibrium in period flows - not reflected in standard Nipas mainly because they do not add exports to internal final production -. 2) Such balance depends on parameter a, or period average markup, that ranges between 1 and 2 in the average but not necessarily in particular sectors, and is a function only of average surplus-rate. 3) Real market prices are considered the only functional and available expressions of value needed to measure flows, exchanges and aggregates, independently of the employed concept of value. Valuations of capitals or costs not transacted in the period market are not considered here, because they are not part of period flows. 4) Model relates microeconomic sectors with macroeconomic aggregates after a past period, and derives expressions for total transacted, total value-added, rates of profit, absolute surplus rates, and average markup factor. 5) Model can not predict, it only seeks to explain past economic periods. It might be used as a guide to orient economic policies and eventually, to set limits that dynamic models should fulfill.

Sectoral and aggregate estimates of the cyclical behavior of markups: Evidence from Germany

Sectoral and Aggregate Estimates of the Cyclical Behavior of Mark-ups: Evidence from Germany. — The paper presents evidence of the cyclical behavior of the price to marginal cost ratio for Germany. Average markups are estimated both for two-digit manufacturing industries and for the aggregate economy, the results being quite similar once the difference between gross output and and value-added markups is accounted for. Over the business cycle, markups appear to be countercyclical for most parameter constellations. This is interpreted as empirical support for business cycle theories that rely on aggregate demand shocks to affect markups inversely, thus producing procyclical real wages and productivity without having to assume technology shocks.

The Cyclicality of Mark-Ups and Profit Margins: Some Evidence for Manufacturing and Services

This paper uses industry and firm data to look at price cost mark-ups and firm profit margins in U.K. manufacturing and services. In particular it examines how they behave over the business cycle. It has two main findings. First, the estimated average mark-ups and the profit margin results both suggest that there is imperfect competition in manufacturing and services. Second, mark-ups are pro-cyclical, as are profit margins even after allowing for movements in their standard determinants. This suggests that price pressures may increase during recovery periods and decrease during recessions. One possible explanation for this is Kreps and Scheinkman's argument that the pro-cyclicality of capacity constraints means that firms move between Cournot and Bertrand competition over the cycle. The finding that mark-ups are pro-cyclical also raises doubts about macroeconomic models that assume that demand shocks may affect employment via counter-cyclical mark-ups.

Fire insurance in Germany: A comparison of price-performance between state monopolies and competitive regions

Up until 1994 there were two different forms of organizing the fire insurance market in Germany. While a state monopoly applied in 13 regions, a competitive market system combined with government regulation existed in the rest of the country. This study identifies the effects of market forms on the price-performance of insurance companies. It is based on annual company data including premium revenues, damage payments and general expenses for the period 1980–1994. The estimation results indicate that monopolies had a 22 percent lower markup on damage payments compared to companies in competitive regions with an average markup of 42 percent. The difference may be explained by higher selling costs for companies in competitive markets, indicated by a high share of commissions in total expenses.

Inflation Targeting in a St. Louis Model of the 21st Century

Inflation targeting is a monetary policy rule that has implications for both the average performance of an economy and its business cycle behavior. We use a modern, rational expectations model to study the twin effects of this policy rule. The model highlights forward- looking consumption and labor supply decisions by households and forward-looking investment and price-setting decisions by firms. In it, monetary policy has real effects because imperfectly competitive firms are constrained to adjust prices only infrequently and satisfy all demand at posted prices. In this 'sticky price' model, there are also effects of the average rate of inflation on the amount of time that individuals must devote to shopping activity and on the average markup of price over cost that firms can charge. However, in terms of the welfare effects of long-run inflation, it is optimal to set monetary policy so that the nominal interest rate is close to zero, replicating in an imperfectly competitive model the result that Friedman found under perfect competition. A perfect inflation target has desirable effects on the response of the macroeconomy to permanent shocks to productivity and money demand. Under such a policy rule, the monetary authority makes the money supply evolve so a model with sticky prices behaves much like one with flexible prices.

PRICE, MARGINAL COST AND THE BUSINESS CYCLE†

We estimate mark-ups of price over marginal cost for UK manufacturing, based on the approach of Hall (1988). We also extend his method to allow for varying mark-ups over industries and the cycle. Using data on 16 two-digit industries, 1968-89, we find: (1) the average mark-up in UK manufacturing is 2.00, (2) mark-ups are procyclical, (3) mark-ups are higher in more concentrated industries. Finding (2) is evidence against the macroeconomic theory that the transmission of demand shocks to employment works via counter-cyclical mark-ups. Finding (3) suggest a significant relation between mark-ups and market structure that has proved elusive in industrial economics studies that use profit rates to measure mark-ups. Copyright 1995 by Blackwell Publishing Ltd